The ‘lipstick index’ is back – and retailers are trying to make money

Target has added new brands to its beauty department. At a growing number of stores, it also has mini Ulta Beauty shops with prestigious brands.

Melissa Repko | CNBC

As prices rise, some people have decided not to buy a new outfit, put off major purchases like TVs, or cancel Netflix accounts.

But for now, they still spend on beauty.

For retailers, the beauty category has become a rare bright spot as people are reluctant to spend amid rising inflation. Often viewed as an affordable luxury, according to The NPD Group, it is the only discretionary retail category with increasing unit sales in the first half of the year, tracking categories such as clothing, tech and toys, as well as beauty products at specialty and department stores.

“You may not be able to eat out very often, but you can buy yourself a lipstick,” said Olivia Tong, analyst for Raymond James.

This spring, Target cited the strength of its beauty sales, even as it cut its earnings outlook twice for the year. Walmart is also investing in the category, introducing new beauty displays in hundreds of stores, despite warnings that shoppers are skipping discretionary categories like apparel.

Other factors also work in favor of the industry. Weddings and parties have resumed. More and more people are going back to the office and can no longer hide behind their zoom filters. And during the pandemic, some people have gotten into the habit of pampering themselves at home with face masks, hair treatments, and other beauty products.

Larissa Jensen, beauty analyst for NPD, called it the return of thelipstick index” – a term made famous by Leonard Lauder, chairman of the board of directors of Estee Lauder, to explain the soaring sales of cosmetics during the recession in the early 2000s.

As consumer confidence has fallen, lipstick sales volume has soared, Jensen said. That increase has been extended to other beauty products. Sales of makeup, including lipstick, are up 20% in the first half of the year, skin care is up 12%, fragrance is up 15% and hair care is up 28% in the first half of the year — and they all grow in units, as well as dollars, she said.

Much of the beauty category’s growth comes from households earning more than $100,000 a year, and Jensen said discounters may be having a harder time capitalizing on the trend. Still, beauty’s resilience can help big-box retailers in a slump — if they can figure out how to cash in.

Beauty for $3, $5, $9

Walmart and Target have both slashed their profit forecasts after slashing prices on clothing, home goods and other products that don’t sell. Still, both companies are revamping their beauty departments and adding new brands to attract customers.

A year ago, Target started opening hundreds of Ulta Beauty stores in its stores with brands like MAC Cosmetics and Clinique. The company plans to add more than 250 this year and eventually have the stores in 800 locations, representing about 40% of its U.S. footprint.

And after fragrance became the number one sales driver for prestige beauty over the past holiday season, it also added popular fragrance brands to its Ulta stores, including Jimmy Choo Man, Juicy Couture and Kate Spade New York.

Since January, Target has introduced more than 40 brands to its stable of beauty products, including “clean” products that are free of certain ingredients and Black-owned and Black-founded brands.

During an earnings call in mid-May, CEO Brian Cornell said beauty saw double-digit growth in comparable sales in its fiscal first quarter from the same period last year. That broke away from other categories, besides food and drink and essentials, which saw a noticeable slowdown.

Walmart has added about a dozen prestigious beauty brands to select stores. It struck a deal with British beauty retailer Space NK to add to the range and develop a private label.

Melissa Repko | CNBC

At Walmart, new beauty displays were set up at 250 of the company’s locations this summer, featuring Mario Badescu, Patchology and other brands typically found in specialty beauty salons or department store makeup counters.

A more affordable display called “Beauty Finds” also began rolling out to nearly 1,400 stores, offering shoppers lip glosses, lotions, and more for $3, $5, or $9.

Walmart has also made exclusive deals with direct-to-consumer companies such as Bubble, a skincare brand with colorful packaging and aimed at Gen Z and young millennial customers. It has grown its cosmetics business at double digits in recent quarters, said Creighton Kiper, Walmart’s vice president of beauty merchandising.

“Beauty is this fascinating category where it’s not like food and it’s not like health and wellness, yet the customer is on it every day,” he said in an interview earlier this summer. “You have this mental wellness component to have confidence and feel good about yourself.”

When budgets get tighter, Kiper said customers may also fall back on skills learned during the pandemic — like doing their nails or hair color at home — and head to Walmart to shop for a salon twist at home.

Ashley Marie Lemons, a stay-at-home mom in suburban Atlanta, said her family eats out less because they spend more on groceries, diapers and other essentials. She said she is cooking more meatless meals and buying hot dogs instead of more expensive meats, such as ribs.

But she said she still allows herself to spend about $50 a month on beauty products like eyeshadow pallets and mascaras.

“It’s an outlet for me,” she says. “Some people like art. It’s a creative way for me to express myself.”

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